umbrella Company, contracting taxes plus VAT

foxhill

Hi,
I am asking this on behalf of close friend of mine.
He is contracting for public service entity via an Agency.
He use an umbrella company who pay taxes (PRSI class s1), Social contributions, also pays x euro per week to umbrella company depending upon the earnings.
Agency company pays weekly, last week, agency sent him remittance of 2804 Euro
then on payslip, it showed 2280 euro as basic pay, upon inquiry with umbrella company, It was told that 524 Euro deducted is 23% VAT, which is paid to revenue
then out of 2280 Euro:
PAYE 332.15 Euro
USC 86.47
PRSI ee 72.78 Euro
Umbrella Fee 91.20Euro
>>
total 582 Euro
was deducted, he submitted receipts of expenses of 853 Euro. however, last pay is 1697 Euro (which is 2280-582=1697). Expenses are added at one place and subtracted at other line!

I am very confused about the all this. is it fair or is he paying too much?. is there anyway, he could reduce these deductions(1100 euro I think is excessive).
other questions, as he pays taxes as an normal employee, does that mean, is he eligible for holidays pay, sick leave etc. who will pay holiday pay? how to claim? if any.

I am thinking myself as going as contractor, but it does not seems good deal at all!
Please share your knowledge.
Many thanks for your help.

house1281

Hi foxhill,
A retention rate of 74% on weekly gross figure of €2.3k is in my humble opinion "fair". Take an employee how is earning a weekly gross of €2.3k he/she would expect a retention rate of around 59% or €1,355 compared to your friend who achieved a net take home of €1,697. In other words your friend is better off by €342 net per week. As an employee you would need to earn an additional €680 gross to match this figure your friend is earning.
I work for an accounting provider and we offer similar solutions to what your friend is using and I did some quick calculations and the figures seem relatively accurate ( I am missing some pieces of information such as tax bands and tax credits).
In relation to your point on "Expenses are added at one place and subtracted at other line!" I suspect these are tax deductible expenses rather than client reimbursed, therefore if you incur an expense for example you have to go on a business meeting offsite and you pay for parking lets say it cost €10 and you pay for this parking out of your own money, when you submit this expense through the limited company essentially what happens is that it reduces your taxable income by €10 meaning you have saved in the above example 52% tax. The easiest way to think of tax deductible expenses is that you will receive half the cost back through tax relief, using our €10 parking ticket essentially it has cost you €4.80 as you have reduced your tax by €5.20. Client reimbursed expenses are different in that if they are vouched (receipt) you will receive the full amount back tax free.
I hope this makes sense, it is little confusing but this is one of the advantages of being self-employed the more business expenses you incur the less tax you pay. As with your friend he/she incurred expenses of €853 this has reduced the level of tax your friend paid.

"I am very confused about the all this. is it fair or is he paying too much?. is there anyway, he could reduce these deductions(1100 euro I think is excessive)."
I hope I have reduced some of your confusion with the above information, the figure you quoted of €1,100 is thankfully not correct as you are including VAT. VAT is paid directly over to Revenue, when your friend agreed a rate with the client or recruitment agency he/she was more than likely informed that the rate was ex-VAT as this would be industry standard. In other words your friend probably agreed to a weekly rate of €2,280... So technically the only personal deductions that your friend incurred are: €582, which as I mentioned is good by comparison to an employee as the retention rate is 74%, significantly higher than an employee would expect or achieve.

"other questions, as he pays taxes as an normal employee, does that mean, is he eligible for holidays pay, sick leave etc. who will pay holiday pay? how to claim? if any."

Self-employed people (directors, sole traders etc. ) have to pay PAYE taxes similar to employees, the main difference is that as they are self-employed they pay a different rate of PRSI as in your friends case he/she is paying class S. Self-employed people do not get paid holidays, or sick leave and these are two important elements you should take into consideration when you are negotiating a rate with a potential agency/client. You will find that when you work as a self-employed contractor you will potentially be on a higher hourly/daily/weekly rate. If you are not being offered a higher rate to work as a contractor, then this negates the benefit of working as a contractor. Some companies will offer you the ability to work for them on a contract basis as self-employed or as a PAYE employee, if the rate is the same I personally would go PAYE employee. If however you are being offered a higher rate of payment to go self-employed then this is when it can work out more lucrative for you. If you are interested in learning more about contracting I recommend you speak with some of the recruitment agencies that specialise in contract positions in your industry.
If you are concerned with the likes of sick leave, some contractors avail of income protection insurance, you can also set up pension funds to help improve your retention and reduce your taxes.
Contracting is not for everyone, but hopefully I have shed some light on how it works, if not feel free to ask me more questions or PM me for more info.
KR,
house1281